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Legg Mason Rises as it Repurchases KKKR Notes to Cut Debt

Legg Mason Inc., the money manager whose biggest shareholder is activist investor Nelson Peltz, rose by the most in almost six months after saying it will repurchase $1.25 billion of debt from private-equity firm KKR & Co. and buy back more stock.

Legg Mason climbed 7.5 percent to $24.05, the biggest increase since Nov. 30, after saying it will accelerate $155 million in stock repurchases and plans to buy back an additional $1 billion in shares. Scott Nuttall, KKR’s head of global capital who joined Baltimore-based Legg Mason’s board when the debt investment was made in 2008, will step down.

Peltz, who is known for pushing companies to increase their share prices, joined Legg Mason’s board in October 2009 after investor withdrawals and losses related to its money funds had sent the stock tumbling 63 percent in the prior two years. Legg Mason’s Chief Executive Officer Mark Fetting has since cut jobs to increase profitability and has completed a program designed to save $130 million to $150 million per year. The plan announced today will reduce gross debt by $350 million immediately, Fetting said in today’s statement.

“This is a positive announcement for the company due to the increase in share buybacks and reduction in gross debt,” Macrae Sykes, an analyst with Gabelli & Co. in Rye, New York, said in an e-mailed statement. “The announcement today further reduces corporate uncertainties about the balance sheet, which should enable management to sharpen focus on operations and asset gathering.”

Legg Mason’s shares are unchanged this year, compared with the 5.5 percent increase in Standard & Poor’s index of 20 asset managers and custody banks.

KKR Investment

The firm had sold $1.25 billion of notes to KKR in 2008 to increase capital to support its money funds from losses linked to subprime mortgages. The convertible notes paid 2.5 percent and were due in 2015, Legg Mason said.

The terms of today’s transaction include a prepayment fee of $6.25 million to KKR and the issuance of new warrants that provide for the purchase of about 14 million shares of common stock at $88 a share.

Kristi Huller, a spokeswoman for New York-based KKR, declined to comment on the transaction.

“We will improve our capital structure by reducing gross debt,” Fetting said in the statement. “With this efficient capital structure, we will also have flexibility to return a significant portion of the cash we generate to our shareholders when it is appropriate to do so.”

New Debt Sale

Legg Mason today issued $650 million in debt to help pay back the KKR notes, selling seven-year bonds with a 5.5 percent coupon.

Apart from returning cash to shareholders, the refinancing of the notes will help Legg Mason free up cash to make targeted acquisitions, Fetting said today.

Legg Mason’s fiscal fourth-quarter profit increased 10 percent as expense cuts offset the impact of lower stock and bond assets. Expenses fell 6.2 percent to $576 million in the three months ended March 31 as Legg Mason completed its restructuring plan. Costs from that plan fell to $1.9 million in the quarter, compared to $15.7 million a year earlier.

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